Eastman Kodak Company (Kodak) at one point owned 89% market share of photographic film sales in the United States. Kodak invented photographic film and then went on to invent the core technology used in digital cameras. Kodak filed for bankruptcy protection in January 2012. Technology disrupted its business. Ironically, it was the technology that Kodak invented.
Kodak made a strategic decision related to digital photography. The company decided to slow down the introduction of digital photography because it would threaten its photographic film business. At that time, the company dominated both film and camera sales in the United States. Kodak decided to move to digital technology over a ten year period rather than immediately.
We can list many companies that have been disrupted by technology, such as Borders, Blockbuster, Encyclopedia Britannica, etc. We can also name industries that have been disrupted by technology, such as the music industry, the newspaper industry, the publishing industry, etc. They all had to make a choice: Adapt and prosper, or resist cannibalizing your existing business and fail.
Moving Away from the Branch Centric Model
Banks are currently facing a similar dilemma. Most banks have built a branch network that has been the focus of their business. Banks are excellent at branch banking. They have been very successful at executing a branch centric approach to the marketplace (see graphic below). Except for a few years during the recent financial crisis (late 2007 through 2011), the performance of the banking industry has been stellar for many years. Banks have been reluctant to do anything that would threaten their branch centric approach. They have invested significant resources in the branch system, they understand branch banking, and protecting it has been paramount.
However, consumer behavior has been changing rapidly. Technology is providing consumers with the ability to do banking on their own terms and not the bank's. Banks have historically owned the payment system in the United States. If you were doing a financial transaction, it was going through the bank, and in most cases, that meant the branch. But that is changing dramatically.
Let's look at what has been happening in recent years. Technology applied to banking is nothing new. However, in recent years consumer acceptance of technology related to banking has accelerated at a pace never seen before in our industry. Anyone who remembers when Internet banking was first introduced will recall that it was introduced several times and failed to be accepted because of security concerns. It wasn't until all of the security concerns related to online banking were satisfactorily addressed that consumers embraced it. Then, as they also gained an increased comfort level with technology in general, the internet as a platform for other banking applications as well as other forms of electronic delivery was embraced.
Consumer acceptance of these technologies has resulted in a significant decline in branch transactions. This is a trend that is happening at banks of all sizes throughout the country. According to Brett King in Bank 3.0, "Within just ten short years, we've gone from 50-60 percent of transactions done over the counter at the branch to 95 percent of our day-to-day transactions now going through the mobile, Internet, call center, and ATM." There has also been a decline in the use of checks and cash across the country. Many consumers have found debit cards, prepaid offerings, digital currencies, and credit cards easier to use than checks and cash. The decline in branch usage coupled with the consumers' acceptance and comfort level with the Internet and other electronic delivery has resulted in an increased number of branch closings by many banks. According to an article in BAI Banking Strategies entitled Branch Closures Round Two?, more than 7000 branches in the U.S. were closed between mid-2009 and mid-2012. The disruption in financial services is also happening in lending, investment services, and even with financial advice. Significant disruption is happening in many facets of the financial services industry right now.
In Andrew Grove's book Only the Paranoid Survive, he discusses the concept of an Inflection Curve (see diagram below). There are strategic inflection points, disruptions to the way you do the things you have always done. The banking industry is now being disrupted by technology just as Kodak was disrupted. Like Kodak, banks need to make a key strategic decision. Will they continue to do what they have always done or will they adapt to the changing world of financial services? When you're being disrupted, if you continue to do what you've always done, you're going to fail. If you adapt to the disruption, you can take your business to new heights.
Source: Only the Paranoid Survive –Andrew S. Grove
In order to adapt, banks need to shift their mindset from being Branch Centric to Customer Centric. The customer should be placed at the center of every decision the organization makes.
The critical decisions involve determining which aspects of banking are experiencing the disruption and need to change and which aspects will still be relevant in the future.
The Customer Centric Model
A customer centric approach requires the bank to know and understand the marketplace and its customers (see graphic below). This requires some form of market segmentation to be implemented at the bank. Market segmentation allows the organization to truly understand the makeup of the marketplace and then determine which existing and prospective customers have the greatest potential and are most important to the bank's future. Let's call them the high priority customers. Your bank needs to be able to answer the following questions about all of the different segments in the marketplace and particularly about the high priority customer segments:
Market segmentation is about treating different customers differently because the customer doesn't want a one-size-fits-all solution. The customer wants the bank to understand who they are, what they care about, and provide the customized solution they prefer.
Customer centric thinking involves connecting with customers along two dimensions, depending on the context of the customer's situation and his/her preferences. The two dimensions are human engagement and digital engagement. There are times when the customer prefers human engagement because the interaction involves a complex financial need or problem to solve. There are other times when digital engagement is the customer's preference. This may be because the need is a routine transaction or just because the customer doesn't want to take the time for human engagement.
The challenge for the bank is connecting with the customer based on his/her preferences and making sure that the customer's experience during those connections is superior to what they will encounter with a competitor. The first step toward ensuring that it is superior is to decide what that experience should look and feel like from the customer's perspective ahead of time and then build an organization to consistently deliver that experience at all of its touchpoints.
Parallel Transformation Strategy
One of the challenges is how do you transform the bank to a customer centric model while continuing to reach performance targets during and after the transformation. Also, equally important, how do you take the bank to higher and higher levels of performance in a business that is undergoing significant disruption? The Harvard Business Review article entitled, Two Routes to Resilience, talks about an approach that has been successfully implemented at companies such as IBM, Apple, and Xerox among others. A version of this approach has been and can be successfully applied to banks. The Parallel Transformation Strategy is a path your organization can take to move from being branch centric to becoming truly customer centric (see graphic below).
The balance that every organization needs to find is how to provide stability while promoting change. The Parallel Transformation Strategy does both. This approach involves repositioning the branch based on the changes discussed earlier. It also involves repositioning the role of electronic banking as it takes on greater and greater significance. The repositioning of both should occur at the same time but the end result needs be greater integration among all delivery channels for the customers.
The first step is to set up two distinct task forces. Each task force independent of the other decides what the organization needs to do to respond to the changing expectations of customers. Each task force needs to be comprised of the appropriate cross section of employees that have the knowledge and expertise to reposition their assigned area to effectively compete going forward.
Task Force A will focus on repositioning the role of the branch. The branch has historically been the focus of most banks, and the job of the task force is to figure out how to deliver a superior customer experience to the customers who choose to use the branch. However, the bank needs to shift its mindset away from thinking that it is all about the branch. This will require the task force to gain clarity of insight into who wants to use the branch and for what purposes going forward. Here is a sampling of the types of insights Task Force A will need to obtain through feedback from existing and prospective customers:
The customer has the answers and the bank needs to listen to what the customer wants. The branch becomes one delivery channel among numerous options going forward. Task Force A isn't trying to harvest all of the remaining profit out of a branch system that it believes will become obsolete. It is just the opposite. Task Force A is trying to construct a branch system that can effectively compete long term by repositioning it.
Task Force B will be focused on repositioning the role of electronic banking. As indicated earlier, the consumers' acceptance of technology related to banking has arrived. However, every consumer has not embraced technology in the same way. It is important to note that some level of acceptance of technology related to financial services has occurred in every age group. Obviously, research tells us that a higher percentage of the twenty-somethings embrace it than some of the older consumers. But it needs to be stressed that a significant percentage of every age group has accepted some level of electronic delivery related to financial services. Your bank's challenge is to figure out which of those consumers are most important to your future and which electronic delivery channels are most important to them. Then, you will know which delivery channels to invest in, which product and services to develop, etc. Task Force B has the daunting challenge of figuring out how its organization should proceed in repositioning itself in the realm of electronic delivery moving forward. Here is a sampling of the types of insights Task Force B will need to obtain through feedback from existing and prospective customers:
The answers to these questions and other related questions reside with the existing and prospective customers. The challenge is to uncover them through listening posts that are established everywhere the customer can provide valuable feedback.
After Task Force A and Task Force B complete their tasks, the two task forces get together and figure out how to meld their findings and recommendations together so it results in greater integration among all delivery channels and, ultimately, a superior customer experience.
One community bank used this approach as part of its strategic planning. When the two task forces got together to discuss their findings and recommendations, they found surprising similarity in their thinking. That is ideally what you would like to have happen in this process, but you don't actually expect that it will. The findings and recommendations of these two task forces were then presented to the strategic planning team, and they built a plan on how they will reposition their organization to compete going forward. This is a community bank that has truly excelled at branch banking but recognizes that doing what they have always done will not result in the same outstanding performance that occurred in the past. They want to compete in the future as successfully as they have competed in the past.
For many banks today, it isn't about competing as successfully in the future as they competed in the past; it is about survival. Whether it is about continuing to be an outstanding performer as you move into the future or it is about survival, disruptive forces will impact your organization. You need to decide if you will determine your future by adapting to the changing environment, or if these forces will impose changes upon you by surprise. Philip Kotler, the marketing guru said, "There are two kinds of companies: those who change and those who disappear."
Lance Kessler worked in banking for 25 years before starting his own bank marketing consulting & training firm, Lance Kessler & Associates. He is on the faculty at numerous national and state banking schools. He is a frequent speaker on marketing, sales & service, management, and organizational development topics at industry conferences and has authored numerous articles on these topics. Email: LanceKessler@comcast.net